EMU divergence

Markets and journalists are discussing (once again) the one-size-fits-all problem of ECB policy, with the Bundesbank questioning the generous provision of liquidity and its reignition of the exit debate pouring oil into the fire.

Yes, the economic paths for the peripherals are severely uphill, but reforms being implemented should allow for modest growth starting in H2. Meanwhile, the unexpectedly large 1.2% drop in German industrial production (IP) in February and falling retail sales in Jan/Feb came as a gentle reminder that the German economy is far from reaching warp-speed and that despite the impressive labour market performance and a slightly higher-than-expected wage settlement in the public sector German consumers are unlike to embark on a shopping binge anytime soon. Even with a reversal of the negative weather effect in March IP and upward revisions to retail sales GDP has probably stagnated in Q1 and is unlikely to grow by more than ¼% in Q2, since peripheral weakness is taking its toll on German growth – as could be seen from the 11% yoy drop in orders from other EMU countries in Jan/Feb. So we will probably witness quite a few ECB press conferences before Mr. Draghi starts talking about the “exit” without being asked by impatient journalists.